Neo Performance Materials target cut by Paradigm

It was a weaker quarter from magnet manufacturer Neo Performance Materials (Neo Performance Materials Stock Quote, Charts, News, Analysts, Financials TSX:NEO), but Paradigm Capital analyst J. Marvin Wolff is staying bullish on the stock. Wolff delivered a report to clients on Monday where he reiterated a “Buy” rating while lowering his target price from C$25 to C$16, saying the company should benefit from multiple expansion and higher profitability as a vital participant in the electric vehicle (EV) boom.

Toronto-based Neo Performance Materials is the global leader in the manufacture of NdFeB hot-formed and bonded permanent magnets, which are used in the auto industry for micromotors and for traction motors in the EV industry. Neo is also a global leader in the supply of rare earth materials for catalytic converters and has three decades of experience in the rare earth business.

The company reported Q1 revenue of $135.5 million compared to $166.3 million a year earlier and adjusted EBITDA of $787,000 versus $33.2 million a year ago. Neo’s operating loss was $4.0 million and its net loss was $10.7 million and the company had cash and equivalents at the quarter’s end of $145.7 million plus restricted cash of $1.2 million. (All figures in US dollars except where noted otherwise.)

Wolff said weak neodymium (Nd) prices and soft product demand impacted the quarterly results, with the $135.5 million in revenue coming in under his estimate at $156.5 million. The adjusted EBITDA at $0.8 million was well under his forecast at $19.2 million and the EPS loss of $0.23 per share was also under Wolff’s projection at positive $0.19 per share.

Wolff said the global demand for magnets and catalytic converters has been slow to respond to the (slow) reopening of the Chinese economy after debilitating COVID lockdowns.

At the same time, Wolff focused on the positive in saying that despite a very volatile price and volume industry, NEO has stayed EBITDA positive every quarter for five years running, something he called a strong validation of “very good, quick-to-respond management.”

“We expect NEO’s traditional business lines to normalize and have adjusted our forecast to reflect this. However, the Traction Motor Magnet opportunity is now a go and we are reflecting this in our 2025 and 2026 forecasts,” Wolff wrote.

Wolff’s new target stems from an unchanged 2026 EBITDA forecast of $154 million but with a new multiple of 5x (8x previous) and a ten per cent discount rate (also unchanged). At press time, the C$16 target represented a projected one-year return of 96 per cent.